Covered Bonds - DG Hyp

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DG HYP COVERED BONDS – PFANDBRIEFE – QUALITY THE PATH OUT OF THE CRISIS SPECIAL MAY 2009 government sector is just too lucrative, albeit in phases. All the same, they will probably write less business and their strategic decision-making will be based even more on opportunistic considerations than it has been in the past. When making investment decisions, investors will focus much more closely in future on the pfandbrief issuers‘ interest-rate and funding risk, which leads us to predict that maturity transformation will generate less income in future. The view from here is that banks that focus exclusively on state finance, such as Hypothekenbank in Essen (now part of Eurohypo), will soon be history. This business model is unlikely to be acceptable to the market in future since localauthority lending is a low-margin business where players are exceptionally dependent on maturity transformation and are therefore inevitably exposed to interest-rate-change risk. We should also state in conclusion that despite the crises that are roiling a whole series of property markets, property finance has not reached the end of the road. The banks active in this business segment will adapt their business models to incorporate the lessons they have learned from the financial crisis so far. Their responses will lead them to focus even more on the key themes of risk-responsive margins, adequate capitalisation, liquidity security, and macroeconomic crisis diagnosis. However, we would interpret these changes as fine-tuning of their business models rather than a wholesale switch to a new business strategy. They will behave even more opportunistically in the state-finance business line than now, but they will be lending less in the foreseeable future even as government borrowing swells in response to the crisis. Evolution not revolution in business models 16
DG HYP COVERED BONDS – PFANDBRIEFE – QUALITY THE PATH OUT OF THE CRISIS SPECIAL MAY 2009 Legal framework Germany’s Pfandbrief Banks Act The legal basis for issuing pfandbriefe encompasses market practices/conventions and supervisory structures, as well as rules and regulations specific to the issuer, which constitute the core elements of the institutional framework in which pfandbriefe are enshrined. Even more: the pfandbrief would not exist without the Pfandbrief Banks Act. In recognition of the significant ability of the pfandbrief legal regime to promote confidence and increase ratings, we will present in more detail below the most important elements of the current applicable legal framework – including the recent revision that was only passed into law a few weeks ago. We will supplement this by discussing the areas that we consider still need improving, even after the recent revision. Aside from the detailed regulations of insolvency law included in the 4th Financial Markets Promotion Act, the legislative changes that came into force in 2005 are undoubtedly the most remarkable of all the changes in the last decade. Strictly speaking, this revision was not an “ordinary” amendment of the existing pfandbrief, but rather introduced a new law that for the most part follows the proven German Mortgage Banks Act (Hypothekenbankgesetz - HBG) that was in place prior to that. The Pfandbrief Banks Act (PfandBG) came into force on 19 July 2005 and amalgamated the previous separate regulations governing the issuance of pfandbriefe by specialist ship and mortgage banks as well as public sector banks, and abolished the former “specialist banks principle” with its positive connotations. PfandBG unifies three laws HBG = Mortgage Banks Act; ÖPG = Law on Pfandbriefe and related bonds of public-sector banks; Schiffspfande = Pfandbriefe based on ship pfandbrief law Source: DZ BANK Issuing license replaces specialist banks principle The definition of pfandbrief business as proprietary banking business in the German Banking Act (Kreditwesengesetz – KWG) will permit all banks that have a license to conduct banking business to issue pfandbriefe. A bank must apply to the Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) for a license to transact pfandbrief operations. The license will be granted provided the credit institution meets certain minimum requirements, which are listed below: � Before Juli 2005 today HBG ÖPG „Shippfande“pfande“ The bank must have core capital of at least EUR 25 million. Pfandbrief Act (PfandBG) Pfandbriefe – subject to numerous conditions PfandBG combines three laws BaFin grants licenses Minimum requirements 17
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Covered Bonds - DG Hyp

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